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Advising Clients on the Brink of Unemployment

You can help clients remain financially secure, even when their paycheck is not.

The first few weeks of the virus and financial panic saw nearly 17 million American workers apply for unemployment benefits, and the longer the crisis lasts, the more likely it is that some of your working clients will be affected.

Although there’s not much you can do to help the clients keep their jobs, you can minimize the financial toll they endure if their employment is terminated. And it’s best to start now, before they get the bad news.

This column will focus on those clients who are currently working but worried about losing their jobs, and next time address the steps you should take when clients become unemployed.

Analyze Spending

It’s always good for clients to be aware of where their money is going, but this is even more important when their paychecks might be going away.

Have them track where every dollar is currently being spent and figure out what can be cut now and what should be eliminated if the clients become unemployed.

Using paper and pencil to add up expenses is likely to fail after the first few days, so clients comfortable giving access to their financial information might want to link their primary bank accounts to an app like Mint, YNAB or Clarity Money.   

If and when the financial crisis passes and the client’s employment is less tenuous, the eliminated expenses can hopefully be resumed. But if the clients find out they can go without even in better times, they will be that much more financially secure.

Conserve Cash

Worried working clients might be tempted to use whatever cash they have to pay off debt, thereby reducing or eliminating a large portion of their typical monthly expenses.

But that could be a big mistake, as it will reduce the clients’ liquid assets just when they may need them the most. This is especially true when it comes to what is likely the clients’ largest loans (mortgages, vehicles and education), which are likely to have the lowest interest rates and longest repayment schedules.

In fact, if clients have an upcoming unavoidable large expenditure (like buying a car or paying for college), it may be safer for them to borrow whatever money they can, especially if the interest rate is in the lower single digits.

Yes, they will incur some interest cost while the loan is outstanding. But a portion of the interest expense may be offset by any earnings that the money (safely) invested will generate, making the net price to maintain liquidity relatively small.

If the clients emerge from this catastrophe relatively unscathed, they can always pay off the debt early if they wish.

Invest Conservatively

Despite the recent dramatic decline in stock prices, clients who are nervous about their employment status may want to pull some or all of their proverbial chips off the table now.

Sheltering their investments from further falls can help them avoid a double whammy of losing their job, along with another significant chunk of their assets.

Make sure to make any changes to their overall asset allocation as tax neutral as possible. Sell stock and stock fund positions in tax-sheltered accounts (like IRAs and 401(k)s) first.

If there are investments with a paper loss held outside of sheltered accounts, the clients may want to realize those losses as well, to cut current and future tax bills.

It’s especially important for concerned clients to consider selling shares owned in their employer’s company, as a further deterioration in the employer’s status will not only jeopardize the clients’ employment but also could cut the employer’s stock price (and the clients’ investment values) even more.   

Once clients have contributed enough to their at-work retirement plans to get any employer matching contribution, they may even want to suspend their contributions until their confidence in their job security improves.

Refinance the Mortgage          

If the nervous clients are homeowners and still working, tell them to immediately get in touch with their favorite mortgage lender and get a new 30-year fixed-rate mortgage for as much as the lender will allow (usually 80% of the home’s value is optimal, so that private mortgage insurance isn’t necessary).

At a minimum, the new mortgage will hopefully provide a more affordable monthly payment. If they can take some cash out of the home, they should, as it can be stashed to cover living expenses (including the mortgage payment) until the clients return to work.         

If the clients can’t or won’t take out a new mortgage, at least have them establish a home equity line of credit (HELOC) that can ideally be tapped to pay for future basic and emergency expenses.

A Job for the Other Partner?

Clients who are in a couple with one member currently out of the workforce at home might want to have the nonworking partner start looking for employment, just in case the employed partner loses his job.

If the storm passes and the working partner keeps his job, the stay-at-home partner can stop working (or looking for work) and return home.

But if the working partner does indeed lose his job, that second paycheck will become invaluable (not to mention the new employer’s benefit package). 

Even “gig” or part-time work will help, especially if the work can be done online or from home. Childcare shouldn’t be an issue for any stay-at-home parents, since (by definition) the newly unemployed parent can now assume those duties.

See the Doctor

Once the virus crisis hopefully abates and the health care providers are available to treat conditions other than those related to the virus, your clients who have employer-sponsored health insurance should schedule any procedures for themselves or covered family members that they have been neglecting.

Yes, many workers who lose their jobs will be able to continue their health insurance coverage (for a while, at least) via COBRA provisions.

But not all employers’ health plans are covered by COBRA. Even if your laid-off clients can obtain COBRA coverage, once they find out how much it will cost (especially if they’ve just lost their jobs), it’s likely to make them sick.

Kevin McKinley is principal/owner of McKinley Money LLC, an independent registered investment advisor. He is also the author of Make Your Kid a Millionaire (Simon & Schuster). 

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